Commodity Investing: Here’s How an Investor Can Benefit

The current scenario of global uncertainty, macro headwinds, and geopolitical issues has given a push to the investment into commodities, in addition to gold and silver. 

For any investor, optimal asset allocation into commodities could result in gains from price fluctuations experienced during times of uncertainty, such as war-like situations, trade wars, pandemics, and fluctuations in weather patterns.  

Portfolio diversification is one of the crucial gains an investor will likely get via commodity investment. Depending on their risk appetite and financial goals, investors can look forward to diversifying their portfolios. The outperformance in a particular asset class could easily offset the losses experienced in other asset classes, thus leading to the balancing of the investment portfolio.

While acting as a  hedge against phases of high inflation, investors tend to generally give higher weightage to commodities, which includes precious metals such as gold and silver. An investor can look forward to comparatively better risk-adjusted returns in the long term, considering commodities could provide portfolio protection against a spike in prices. 

Generally, the prices of commodities prices experience a jump in economic expansion and growth, which is likely to have an influence on overall portfolio returns.

Besides, geopolitical factors and supply disruptions could have an influence through substantial rises in prices of commodities such as crude oil, industrial metals, and agricultural commodities. These moves could have an impact on portfolio returns in a significant way. 

Investors can look forward to investing in commodities via registered commodity exchanges, Exchange-Traded Funds (ETFs), Sovereign Gold Bonds (SGBs), and various mutual fund schemes with commodity exposure. 

The various Asset Management Companies (AMCs) or fund houses tend to offer an opportunity to invest in commodities through hybrid or multi-asset schemes. Several of the schemes follow a Fund-of-Funds (FoFs) structure and invest significantly in gold ETFs. 

Similarly, a few offer an investment option via Exchange-Traded Commodity Derivatives (ETCD), adhering to a beyond-gold approach with diversification in other commodities and gold. 

It is important for an investor to understand that portfolios have a tendency towards becoming unbalanced during phases of uncertainties in the markets. Therefore, it is important to rebalance them on a timely basis in order to ensure that the investments continue to address financial goals in the long run, minus running unintended risks.